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San Francisco at Odds With Food Delivery Services

July 30, 2021

A legal battle has arisen between the leading third-party food delivery firms and the City of San Francisco relating to a Covid-era ordinance capping the commissions these firms may charge restaurants to 15% — a cap made permanent despite California’s elimination of Covid restrictions. The lawsuit illustrates the limitations of local jurisdictions to regulate the quickly changing business of app-based food delivery, as well as the perils cities may face when attempting to extend Covid regulations where the justification for the law no longer exists.

Ostensibly, the regulation at issue was designed to protect local restaurants’ profit margins from excessive delivery fees in the context of an immediate and massive shift to food delivery due to Covid restrictions. These restrictions dramatically increased restaurants’ reliance on third-party food delivery platforms such as DoorDash, GrubHub, and UberEats, which profited enormously as a result of this shift.  At the same time, however, these firms provided a necessary lifeline to many restaurants which lacked the technological, advertising, and marketing savvy to reach customers online.

The ordinance capped commissions despite existing contracts with commission structures exceeding that amount.  The ordinance only applied to those firms that served more than 20 restaurants, and excluded “formula retail” stores, such as McDonald’s, Chipotle, etc.  The ordinance also did not address contracts with other third parties, such as suppliers or equipment manufacturers.

Critically, the ordinance, as originally passed, contained a sunset provision to phase out after the Covid-19 pandemic passed. Because of Covid politics and public relations, and because of the temporary nature of the restrictions, the food delivery platforms had little choice but to comply with the law.

But, just as the State of California announced victory over Covid-19 and lifted all restrictions on restaurants and bars, the San Francisco Board of Supervisors modified the ordinance to make the commission percentage cap permanent.

The gig economy firms have long been in the political crosshairs of the San Francisco Board of Supervisors, who believed these firms exploited “gig” workers, hurt small businesses, and unfairly used City infrastructure to enrich themselves. Food delivery platforms’ support of California’s Proposition 22 – the Nov. 2020 ballot initiative that defined app-based transportation (rideshare) and delivery drivers as independent contractors and adopted labor and wage policies specific to app-based drivers and companies – amplified the animosity.

The complaint filed jointly by DoorDash and Grubhub in the US District Court for the Northern District of California challenges the ordinance on various constitutional grounds. First, the plaintiffs allege the ordinance violates the Contract Clause (Article I, Section 10) of the United States Constitution, which prohibits state and local governments from “pass[ing] any . . . Law impairing the Obligation of Contracts.” The plaintiffs contend the Ordinance impairs their contractual relationships with restaurants, many of which prefer the higher commission structure, allowing for greater services.  Second, plaintiffs contend the Ordinance effectuates a “taking” in violation of the federal and state Constitutions prohibit the government from taking private property “without just compensation.” U.S. Const. amends. V, XIV; Cal. Const. art. I, § 19. Third, the ordinance amounts to a due process violation because it arbitrarily and capriciously caps the third-party firms’ ability to generate the revenue needed to cover their expenses, and instead provides preferential economic treatment to certain restaurants at the direct expense of third-party platforms.  Fourth, the ordinance violates the Equal Protection Clause of the Fourteenth Amendment because it applies the 15% commission cap solely to those platforms that serve more than 20 restaurants. Fifth, plaintiffs contend the ordinance violates the First Amendment because it punishes the plaintiffs for their vocal support of Prop. 22. Finally, the ordinance violates the Dormant Commerce Clause because, by favoring smaller, in-state food delivery firms, the ordinance discriminates against larger firms which are based out of state.

The legal battle between the food delivery platforms and the San Francisco Board of Supervisors could foreshadow future battles between technology-driven third-party food delivery platforms and local and state governments which believe – rightly or wrongly – that restrictions are necessary to balance the power between the technology firms and restaurants. The lawsuit could also foreshadow future battles regarding Covid-era regulations that no longer serve their original intended purpose.

The views and opinions expressed in the article represent the view of the author and not necessarily the official view of Clark Hill PLC. Nothing in this article constitutes professional legal advice nor is intended to be a substitute for professional legal advice.

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